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How Does Inflation Affect Cryptocurrencies?

Moneymagpie Team 13th Jul 2022 No Comments

Reading Time: 3 minutes

For a variety of reasons, cryptocurrency investments seem enticing. This can be in the form of Bitcoin vs. Euro trading or directly making purchases using cryptocurrency. Even though the economics of the Bitcoin market are complicated, some cryptocurrencies are built to either resist inflation or have predictable, low rates of inflation. So, let’s find out how exactly they resist inflation.

When It Comes to Inflation, How Big a Role Does Bitcoin Play?

The cryptocurrency market has become more and more closely linked to the overall stock market as a result of institutional investment. As a result, a decline in the value of Bitcoin is likely to be observed in the event of a market decline.

A dual mandate may be in place if the Federal Reserve receives news of rising prices. As policy interest rates rise, monetary conditions will become tighter. Cryptocurrencies like Bitcoin, for example, will consequently experience a price drop.

Is There Inflation in Cryptocurrencies?

Even Bitcoin, which is often referred to as “inflation-resistant,” has experienced inflation. As more Bitcoin is mined, its price decreases, much like it does with gold. Since mining for new Bitcoin is automatically cut by 50% every four years, inflation rates are likewise bound to decline.

If the value of Bitcoin continues to increase versus fiat currencies, investors don’t need to worry about Bitcoin’s yearly inflation rate. However, the performance of other cryptocurrencies may differ.

As an example of a low-volatility cryptocurrency, consider stablecoins, which are tethered to fiat currency. Stablecoins are vulnerable to inflation and might see their value erode over time as a result. The value of stablecoins decreases as the value of the reserve currency decreases.

Deflationary or Inflating?

Technically speaking, Bitcoin is an inflationary currency. This is due to the fact that it was created to resemble gold’s long-term inflation rate. Deflation refers to a drop in the money supply or substitutes for it, not Bitcoin’s purchasing power increasing over time, as the traditional meaning of deflation implies.

A fall in prices is the result of a monetary phenomenon known as deflation. As a result, Bitcoin is not deflationary due to the fact that its supply will remain constant. There will instead be a gradual growth in the supply of coins until it hits a cap of 21 million. This is anticipated to occur around the year 2140.

It’s possible that when this limit is hit, Bitcoin won’t be inflationary or deflationary. A stable monetary base and an unchanging supply are the end results, rather than inflation. This was the plan all along.

Is Bitcoin Impervious to Inflation?

In other words, can Bitcoin be used as an inflation hedge? Coins like Bitcoin offer excellent alternatives to gold as a store of value in the event of inflation.

More accurately, Bitcoin can be described as an “inflation-resistant” asset, as opposed to “inflation-proof,” which implies complete impenetrability to any external change. Bitcoin is widely regarded as an excellent inflation hedge because it is the largest and most established cryptocurrency. It’s even possible to argue that it’s a more effective hedge than gold.

Despite the fact that Bitcoin is more volatile than gold, it has superior long-term growth prospects and is therefore inflation-proof. What’s the reason for this?

  • Limited supply 
  • It isn’t reliant on a single economy or currency. 

Is Inflation Significant for Cryptocurrency?

More money may be invested in digital currencies as a result of rising inflationary pressures on fiat money. For investors looking to broaden their financial horizons, cryptocurrencies like Bitcoin (BTC) and Ether (ETH) provide a terrific option.

In the Event of a Recession, What Will Become of Bitcoin?

The “Great Recession” of 2007–08 was the catalyst for the creation of Bitcoin. A currency that did not rely on third parties or central authority was created by Satoshi Nakamoto in reaction to widespread bank failures. Cryptocurrency emerged as the outcome of this experiment.

Countries with economic linkages can feel the effects of a recession. The inherent diversification of Bitcoin makes it a recession-resistant investment. While the benefits and restrictions of the US economy — such as GDP, export prices, monetary policy, and currency demand — are subject to the US dollar, Bitcoin isn’t bound by any country’s loss or gain.

Bitcoin’s value is also constant, irrespective of the state of an economy. Due to its scarcity and safety, it is highly sought after. It can also be sent anywhere in the world. When a recession hits, Bitcoin is projected to fare better than other cryptocurrencies, such as Ethereum, because its primary function is as a store of value.

Wrapping Up

Cryptocurrencies may react to large macroeconomic news and inflationary increases, but the crucial thing to remember is that they are much less susceptible than traditional asset classes and hence remain an important inflation hedge.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. 

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Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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